When oil and gas explorer Cadogan Petroleum raised £139 million in its flotation on the Main Market in June, partly to fund its drilling programme in the Ukraine, it was a textbook example of how exploration companies are seeing plenty of scope in little-explored regions, such as the Ukraine.
Valued at £531 million on IPO, Cadogan has built up a portfolio of 11 licences, covering 14 fields in the gas-rich Dneipers Donets Basin in eastern Ukraine. The listing shows the attractiveness of the country’s energy sector, as well as continued investor appetite for oil and gas stocks in challenging markets. Denton Wilde Sapte advised Cadogan on its IPO and has also provided legal services on a string of acquisitions and private placings. Denton also acted on the recent Main Market listing of Arawak Energy, with oil exploration and production assets in Russia, Kazakhstan and Azerbaijan.
In addition to recent IPO work, partners Tanya Nash and Martin Kitchen have advised on a flurry of cross-border oil and gas M&A activity within the emerging markets as more players draw on Denton’s global network to write deals. In the last financial year, more than half the corporate deals the firm advised on involved the emerging markets, of which Russia and the CIS account for 31 per cent, Africa accounts for 30 per cent, the Middle East represents around 15 per cent, with the balance split between Turkey and the rest of the emerging markets.
Nash observes: “The emerging markets are a strong feature of our practice, and are becoming more so. Companies will use us because of our oil, gas and other sector expertise and our presence in the local jurisdictions. We have been present in these markets for a long time, which has enabled us to offer a blend of local and cross-border transactional skills, which clients appreciate.
“We are also advising on more deals with no UK element to them at all. This is partly due to our international network and partly explained by the neutrality of English law for foreign buyers involving assets situated in overseas jurisdictions.”
One such example of Denton’s international reach is the $450 million (£228 million) takeover of Turkish confectioner Intergum, which dominates almost half the gum market in Turkey, by Cadbury Schweppes last year.
“We’re not Cadbury Schweppes’s usual lawyers, but we were used because we have a large, well-established office in Istanbul. Clients are looking for strength and depth on the ground that we can provide in these jurisdictions” says Kitchen.
The partners have seen the number of cross-border M&A contracts with no UK parties being written under English Law rise, owing to a number of factors, such as the perception that English Law is more developed and “certain” than any other legal system.
Kitchen notes: “English Law is used in several situations where investors are seeking the protection of a neutral body of law in preference to the local system.” Kitchen, who regularly advises Jersey-listed funds managed out of Moscow and Germany that are mostly invested in Russian businesses through holding companies in Cyprus, says these types of funds insist on English Law:
“The funds invest on a part-ownership basis and are very keen to ensure that they can have a managed exit when they want to dispose of their assets and raise sale proceeds. One of the ways of doing this is by having a ‘drag-along’ right, which enables the investor to enforce a sale.
“In a number of jurisdictions, including Russia, there is a question mark over the effectiveness of this provision as the view under their law is that a ‘drag-along’ right restricts shareholders’ rights as it forces them to sell. As a result, these funds would never do deals under Russian law.”
Cross-border deal-making presents many of the same issues as domestic deals. However, it tends to be a lengthier, more complex process as a result of stumbling blocks in due diligence and regulatory overlay.
Nash explains: “In many cases, due diligence reveals blanks. This is not always because information is being withheld, but often because it hasn’t ever been produced. So it’s always advisable to use strong local advisers and to do as much independent due diligence on the target as possible.”
In some regions, private companies are not required to disclose financial figures or sensitive commercial information, which can lead to awkward moments between advisers and clients when discussing commercially sensitive information.
“The vendor doesn’t naturally see it as their role to provide this sort of information, and there can be a lot of negotiation and positioning to get the vendor to this point,” says Kitchen.
Transparency can also bring additional complexities to the table. In some jurisdictions, such as Russia, it can be difficult to discover who owns the assets that are being sold. “Due to the personal security concerns of prominent individuals in Russia, they are keen to maintain a level of confidentiality. In some cases, private investigators will be hired to do research and ascertain who ultimately controls the assets,” observes Kitchen.
“They don’t want to be known for having valuable assets in the country, but you need to know with whom you’re transacting.”
Many jurisdictions require large amounts of paperwork to run a business, such as annual permits and consents from local and national bodies. Nash explains that the running of the target business will require this crucial paperwork, but getting some of these documents may be dependent on the personal relationships of the existing owner.
Nash notes: “Sometimes it’s not just about compliance, but about relationships with the bodies that are granting these permits. You will need to understand to what extent the business is successful because of current owners and key employees having the right relationships in the local business community or with local regulators, which ensure the annual permits arrive each year. It’s important to have local advisers who understand the market, the relationships and the influencers.”
When acquiring overseas targets, the partners stress the importance of investors and advisers to take a different risk approach to Western deals and adjust their appetite to risk.
Risk factors can vary from high-level country risk, with the varying appetite of the state to control strategic assets, to lower-level political risk.
Nash says: “Oil and gas assets are a hot potato because the state is always interested. There are things that you will be doing that would make you feel uncomfortable if you were doing them in a UK transaction. You have to take it on the chin, cost it and balance it against the upside of participating in a growth market.”